The National Stock Exchange (NSE) on Monday came out with a consultation paper suggesting that constituents of Nifty Next 50 index should be only stocks where derivative contracts are traded. Currently, the Nifty Next 50 index represents the balance 50 companies from Nifty 100 index after excluding the Nifty 50 companies.

According to NSE, there are 20 passive funds tracking the Nifty Next 50 index with a total AUM of ₹11,600 crore as on March 31, 2023, (seven ETFs with AUM of ₹5,560 crore and 13 Index funds with AUM of ₹6,040 crore). “With the number and asset size of passive funds tracking the Nifty Next 50 index increasing, ensuring index constituents’ liquidity and ease of index replication by passive funds gains more importance,” NSE said in the consultation paper.

Non-F&O stocks

Currently, out of 50, 11 stocks with a cumulative weight of 9.05 per cent as on May 16, are not available in the derivative segment. “The exposure of the index to such non-F&O stocks (that are being included in/ excluded from indices) frequently hitting the price bands, lowers the ability to replicate the index portfolio efficiently and thus increases the tracking error,” it further said.

One way to resolve this issue of index replication is to only include those stocks into the Nifty Next 50 index that are available for F&O trading. Stocks that are available for F&O trading are typically more liquid and accessible than other stocks that are not available for F&O trading, the consultation paper mooted.

According to the proposal, while initial eligible stocks would be from Nifty 100 and the deficit number of stocks from Nifty Midcap 50 based on six-month average full market capitalisation, it added.

Henceforth, weight of each stock in the index would be capped at 23 per cent and aggregate weight of top 3 stocks at 62 per cent. Currently, cumulative weight of non-F&O stocks is capped at 10 per cent and F&O stocks at 4.5 per cent.